Paragraph 67 in Chapter 2 of the King III Report lists the following criteria for a director to be considered as independent:

• not being a representative of a shareholder who has the ability to control or significantly influence management or the board;
• not having a direct or indirect interest in the company (including any parent or subsidiary in a consolidated group with the company) which exceeds 5% of the group’s total number of shares in issue.
• not having a direct or indirect interest in the company which is less than 5% of the group’s total number of shares in issue, but is material to his personal wealth;
• not being employed by the company or the group of which it currently forms part in any executive capacity, or appointed as the designated auditor or partner in the group’s external audit firm, or senior legal adviser for the preceding three financial years;
• not being a member of the immediate family of an individual who is, or has during the preceding three financial years, been employed by the company or the group in an executive capacity;
• not being a professional adviser to the company or the group, other than as a director;
• being free from any business or other relationship (contractual or statutory) which could be seen by an objective outsider to interfere materially with the individual’s capacity to act in an independent manner, such as being a director of a material customer of or supplier to the company; or
• not receiving remuneration contingent upon the performance of the company.

These independence criteria should however, not be used as a formula for the board to determine directors’ independence. It is a useful guideline but it could potentially be the case that a director does meet all of the independence criteria but nevertheless cannot be considered as independent. The reason for this is that independence is in its essence a state of mind. The independence criteria are an attempt to objectively determine a subjective mental state.

The other matter to consider is that the governance requirement for independent directors serving on the board is to provide comfort to stakeholders that there is impartial oversight and a balance of power. Hence the appearance of independence is as important as actual independence.

Paragraph 66 In Chapter 2 of King III summarises it well:

“An independent director should be independent in character and judgement and there should be no relationships or circumstances which are likely to affect, or could appear to affect this independence. Independence is the absence of undue influence and bias which can be affected by the intensity of the relationship between the director and the company rather than any particular fact such as length of service or age.”

The independence criteria should therefore always be understood in the context of paragraph 66 quoted above. In this sense the general definition in paragraph 66 of prevail over specific criteria.